Managing an Income-Generating
Calendar
Let’s say that instead of trading a one-lot calendar, Richard trades it 20
times. His trade in this case is
His total cash outlay is $1,600 ($80 times 20). The greeks for this trade,
listed in Exhibit 11.5 , are also 20 times the size of those in Exhibit 11.3 .
EXHIBIT 11.5 20-Lot Bed Bath & Beyond January–February 57.50 call
calendar.
Note that Richard has a +0.18 delta. This means he’s long the equivalent
of about 18 shares of stock—still pretty flat. A gamma of −0.72 means that
if Bed Bath & Beyond moves $1 higher, his delta will be starting to get
short; and if it moves $1 lower he will be longer, long 90 deltas.
Richard can use the greeks to get a feel for how much the stock can move
before negative gamma causes a loss. If Bed Bath & Beyond starts trending
in either direction, Richard may need to react. His plan is to cover his deltas
to continue the position.
Say that after one week Bed Bath & Beyond has dropped $1 to $56.50.
Richard will have collected seven days of theta, which will have increased
slightly from $18 per day to $20 per day. His average theta during that time
is about $19, so Richard’s profit attributed to theta is about $133.
With a big-enough move in either direction, Richard’s delta will start
working against him. Since he started with a delta of +0.18 on this 20-lot